Our experts at Credit Mutuel Asset Management take stock of the market for bond, equity, multi-asset and opportunity investment in 2020, a year that was anything but ordinary, and tell us what might be in store for 2021.
1- Eliana de Abreu answers our questions on the bond markets:
What are your key takeaways for the bond markets in 2020?
The first thing that stands out is that long rates have fallen to new lows, both in Europe and the United States, due to the very swift and decisive actions of the central banks. 10-year Treasury yields sank by a massive 100bp or so to below 1%, contrasting with the 1.92% observed at the end of 2019, with the Fed rapidly lowering its rates to zero as soon as the crisis hit. 10-year Bund yields echoed this pattern, although the fall was less pronounced, going from -0.19% at the end of 2019 to around -0.60%. The other important point, which is again a result of the action taken by the central banks, is the reduction in the cost of financing for all peripheral countries in the euro area. The roll-out of the ECB's pandemic emergency purchase programme sent yields down sharply and has recently enabled Spain and Portugal to join the club of sovereigns with 10-year yields at zero.
How did sovereigns and corporates manage to secure financing in such a tricky year?
Despite the many uncertainties that weighed on the markets in 2020, volumes climbed to record levels. Gross issuance volumes by sovereigns in the euro area in 2020 were all revised up by around €400 billion to more than €1.200 trillion. On the corporate side, we saw an all-time high of more than €400 billion in issues, representing an increase of almost 14% compared to 2019. The high-yield market also registered its highest levels on record. These unprecedented levels were driven by companies’ greater financing needs because of the Covid-19 pandemic, not to mention the fact that, as a precautionary measure, they also quickly sought to secure their liquidity needs or opted to refinance their existing debt early. Other stand-out factors were the increase in ESG-themed issues and hybrid debt issues.
Will central banks continue to play an important role in 2021?
They will continue to play a strong role in 2021 to ensure that financing conditions remain good. There will be a great deal of expectation regarding their role in absorbing the massive sovereign debt issues, notably with the European Union, which is set to finance the bulk of the €750 billion European stimulus package over the next two years. This is necessary in order to support the economic recovery. The ECB already laid the groundwork at its recent meeting by stepping up its measures and making it clear that it would be maintaining very good financing conditions until the pre-crisis inflation and activity dynamics are restored. This will continue to exert downward pressure on both rates and risk premiums.
Against such a backdrop, what is the outlook for sovereign yields?
The gradual improvement in the fundamentals during 2021 may prompt a slight uptick in European sovereign yields, but the actions of the central banks should limit such a movement and keep any tightening of financing conditions in check. In the United States, upward pressure on inflation expectations could materialise with the more favourable growth and inflation dynamics, especially with the prospect of an ambitious fiscal stimulus package. This could prompt a steeper increase in yields across the Atlantic.
Which fixed income classes should investors be looking at in such a context?
In an environment in which the yields on many fixed income securities are negative, investors should continue to put their money in high-yield bonds. The omnipresence of the central banks and expectations of an economic recovery will be key factors in this trend. Investment grade credit instruments are likely to deliver good returns in this context, although the tightening of risk premiums will probably not be as pronounced in this segment in 2021. Cyclical sectors may continue to outperform defensive sectors as the public health risk eases. Subordinated bonds are also likely to provide interesting returns, both in the corporate and financial segments.
High-yield credit instruments also harbour promising returns, not just for the same reasons, but also because default rates might ultimately be lower than expected. Lastly, we also believe that emerging market debt holds some interesting opportunities, for several reasons. Past experience has shown emerging economies to be more resilient than developed economies. Moreover, emerging countries are more exposed to the energy and commodity sectors and should therefore benefit from an upturn in commodity prices if the economic recovery materialises. Lastly, since much of the debt held by emerging countries is denominated in US dollars, the fall in the dollar will have positive repercussions on their financing terms.
2- Christophe Besson gives us his take on the equity markets:
2020 overview
2020, a year of exceptional events and continued contrasting trends on the stock markets
In the end, all major equity markets (global, US, Japan, emerging markets) rose by between +15% and +18%, with the exception of Europe, which nudged 0%. Market tendencies became more clear-cut, with defensive growth and technology stocks rising sharply and discounted stocks being left on the sidelines, drumming up little, if any, interest at the end of the year. One noticeable comeback, however, was staged by domestic small caps that had been left by the wayside for two years, with more volatility despite the rise.
In global equities, the energy sector shed -30%, whereas technology stocks climbed by +44%. We saw commodity and copper-related stocks soar and, of course, transport and leisure-related stocks suffer heavy losses. In Europe, banks remained subdued.
2020 began with the impending end of the economic cycle and question marks over the US election and Brexit, with predictable uncertainty. The US markets nudged record highs in January and February, all the while counting China’s Covid-19 infection tally, before the unforeseeable occurred and travel restrictions were introduced in Italy on 24 February.
This set a series of unprecedented events in motion: whole economies in lockdown, widespread telecommuting, new lifestyles, both professional and personal, massive central-bank intervention and stimulus policies, etc. Oil experienced a “flash crash” in March (plunging -30% on the 9th of the month) before equity markets sank with incredible speed into a sharp sell-off in a matter of days that drew swift action from the world’s central banks (interest rate cuts, unconventional measures, liquidity injections, etc.). The markets bottomed out on 23 March on fears that the Fed’s actions would not be underpinned by fiscal stimulus in the US. However, the markets rallied quickly, spurred on by the combined fire power of the central banks and fiscal policy. Despite oil futures momentarily sinking to -$40 on 21 April, the Nasdaq moved backed into positive territory on 7 May, followed by the SP 500 on 8 June. The Chinese market surged to a five-year high on 3 July and the Nasdaq clocked up another record on 20 July.
The continuation of the market tendencies initiated in recent years has led to the predominance of a handful of stocks, such that the top five largest US companies now make up 25% of the SP 500!
IPOs made the headlines at the end of the year, with some $300 billion raised, but few were carried out in Europe, with some stocks putting on a dazzling performance (x2 on their first day of trading for Airbnb, Snowflake, etc.). The year’s symbolic stock, Tesla, was the first company to enter the SP 500 with a market cap of more than $500 billion, while Nikola, which specialises in electric or hydrogen-powered trucks, foundered on doubts over the reality of its innovations. The markets wavered between dreams and allegations of fraud.
2021, the synchronization of the global recovery
All of the world’s central banks and governments are on the same page to rescue the global economy. Given the stakes, policy differences are becoming more blurred. Debt and deficit ratios are no longer a hindrance and the IMF is encouraging developed countries to “spend big and quick” on simple capital projects and digital and green technology infrastructure.
Sustained low interest rates and the monetization of sovereign debt surpluses by the central banks have paved the way for all manner of developments and are propelling the markets upward. The year-end revival of the forgotten sectors is likely to continue, although their impact on overall market growth remains to be seen, given their low weighting. However, the shift to new lifestyles induced by the lockdowns and the preponderance of the green economy as an unquestionable target for fiscal policy sketch out investment focuses for a few years.
3- David Taieb takes a look at the market from a multi-asset investment angle:
2020 overview
2020 was a strange year that saw a major crisis emerge after our economies were shut down to tackle Covid-19. With this in mind, looking beyond the numbers that translate product performance, the crisis is taking a heavy human toll associated with a very strong social impact, with any return to normality bound to take some time.
The central banks have been able to implement strong supportive policies, with a combination of low interest rates and asset purchasing programmes proving extremely favourable for risky assets. On the corporate side, the winners were all the high-standard industries and sectors that benefited from a digitized environment. E-commerce platforms are the most emblematic examples but they are not the only ones. Some industries (such as luxury goods or brands like Adidas/Nike) have adapted very well and have been able to use their digital tools to quickly adjust their distribution models.
Any nation that can combine these two arguments (central bank policy + digital tools) naturally secures the top position on the economic podium. The United States ticks these boxes.
2021 outlook
As we enter 2021, our scenario sees a gradual resumption of economic activity supported by expansionary fiscal policies and mass vaccination of the population. The growth outlook is improving around the world and, barring any new large-scale lockdowns, the cyclical and industrial operators hit hard by the crisis should be able to get back to business.
We expect the crisis to have two major consequences: the backsourcing of certain industries and the re-synchronization of global economies.
In 2021, there is bound to be some volatility in terms of fund performance. We have already identified a number of risks. Will certain sectors be able to hold onto their current valuations? Is the weakness of the dollar justified? Has gold ended its rise? Will a third wave of the pandemic strike, leading to further lockdowns? Looking further ahead, will corporate debt be sustainable? Risks remain and we will need to be able to strike the right balance in our portfolios by actively managing our safeguards and safe haven investments.
The resilience of our approaches is reflected in the performance of key funds in 2020:
Flexigestion Patrimoine |
4,4% |
6,6% |
CM-CIC Tempéré International |
8,1% |
3,4% |
CM-CIC Equilibre International |
14,8% |
5,0% |
CM-CIC Dynamique International |
19,4% |
4,1% |
CM-CIC Long short Europe |
-3,4% |
2,5% |
Evolio Action Monde |
25% |
4,5% |
We therefore believe that it makes sense to invest in diversified / multi-asset portfolios in the 2021 environment that is shaping up.
4- Jean Louis Delhay gives us his take on the market when it comes to opportunities
What can you say about the market in 2020?
News of various vaccines in November with high efficacy rates has buoyed investors and improved their perception of the future. Vaccination campaigns have begun in the United States, the United Kingdom and now in the European Union also. The signing by Donald Trump of a new economic stimulus package in the US, coupled with an agreement on Brexit, which will now need to be ratified by the European Parliament and the British Parliament, are additional support factors.
Stock markets, which play future developments, have made up much of the lost ground in recent months. For example, the EURO STOXX 50 has clawed back 44.8% from its low in March (19 March 2020) and 20.1% from the low registered at the end of October (31 October 2020).
Ultimately, after a very good year in 2019, the funds delivered positive performances again in 2020.
CM-CIC CONVICTIONS EURO Part RC |
28,2% |
7,9% |
CM-CIC SMALL & MIDCAP EURO Part RC |
32,7% |
16,4% |
CM-CIC FLEXIBLE EURO Part RC |
15,3% |
2,7% |
How is 2021 shaping up?
Despite the virus, which is unfortunately still circulating, investors are looking to the medium term in the hope that the global economy will fare much better in the second half of 2021 and 2022. Their confidence is helped by the fact that the central banks wasted no time in providing support for the economy and are prepared to inject hundreds of billions back into the financial system if needed. The introduction of fiscal stimulus in most developed countries is also a good thing. These three factors explain why the market sell-offs are becoming increasingly short-lived and why most investors are expecting the uptrend in the equity markets to continue in the first months of the year. There may be room for the markets to go even higher in a context where low rates and accommodative monetary policies are pulling share valuations upward. This is the most plausible core scenario, but it assumes that nothing will happen that might call it into question. There might be a prolonged health crisis throughout 2021 or, in a few months’ time, an overly-strong economic recovery that would lead central banks to reduce liquidity injections. However, an investment strategy always involves a fine balance between risk and return. Right now, as we begin the new year, we think that hopes of a further rise must outweigh fears of a fall. Therefore, in our asset allocation for the CM-CIC FLEXIBLE EURO fund, we have an exposure to equities of 65% compared to a neutral position of 50%.
Completed on 04 January 2021
(1) Past performance is no guarantee of future performance.